There is an air of uncertainty in the world today. Relations between India and Pakistan has dipped with escalating violence along the border. China, which has its own share of economic sluggishness recently, is doing its bit to weaken India’s position by funding Pakistan and Bangladesh. Britain has all but signed out of the European Union. Then, there’s the matter of increasing tensions between the United States and Russia. Former Soviet Union leader Mikhail Gorbachev said this week that the world has reached “a dangerous point”, with the Syrian conflict leading to a collapse in dialogue between the two global powers. The results of the US Presidential elections will be crucial in determining global politics.
These are seismic events and their ripples are felt globally. The stock markets, naturally, are not untouched. Following the June 24 Brexit referendum, the Sensex crashed 605 points in unison with markets around the world. On September 29, when India announced it had moved against terrorists beyond the LoC, the Sensex blinked again.
What does an investor do in times of such uncertainty? How does he build a portfolio that can withstand war and market crashes?
Almost every decade in the last hundred years has seen conflicts and economic uncertainties of varying degrees. In those scenarios, money-making opportunities have presented themselves to plucky investors. This scenario we’re in today is no different. It presents its own set of opportunities to secure one’s investment portfolio, and not just survive these uncertainties, but also thrive in them.
So let’s walk through some of these investing ideas.
Hedge your risks
Geopolitical risks and economic uncertainties present an opportunity to take stock of the risks in your portfolio. This may be a good time to exit stocks that are overpriced or stocks in companies whose businesses could be at risk today. Keep an eye on your mid-cap and small-cap investments for these are considered riskier than large-cap ones. Along with your equity investments, have a good mix of secure instruments like bank deposits, PPF, etc. This way, your losses will be minimal anytime the markets start falling. When the economic situation is on the mend, you can start moving your funds from defensive instruments to aggressive ones.
Don’t hoard cash
A war increases government spending. There’s an increase in military spending and production of military goods. This may create a decline in production of consumer goods, creating an excess of demand over supply of consumer goods, which will raise prices. This rise in price may be further fuelled by suppliers who will try to milk the situation for what it’s worth. In this case, hoarding a lot of cash when inflation is rising is a bad idea. For example, if you held Rs. 100,000 in cash and if the inflation rate were to rise to 10 per cent in a year, your money would be worth Rs. 90,000 the following year. It would be wiser to lock your cash in instruments that provide security and growth.
Small savings schemes matter
When there’s all-round uncertainties and you don’t know which market-linked investments to go to, it may be wise to stick to what is secure and offers assured returns. Currently, some of the best-paying small savings schemes include PPF and National Savings Certificate (returning 8.1 per cent annually), and Kisan Vikas Patra and Post Office Monthly Income scheme (7.8 per cent). For the girl child, there’s the Sukanya Samriddhi Scheme (8.6 per cent) and for the elderly, there’s the Senior Citizen’s Savings Scheme (also 8.6 per cent). Government securities, corporate bonds with high credit ratings, and fixed deposits are also relatively safe.
Invest in equity for the long term
For those who haven’t invested the equity, market crashes present good opportunities to move in. For those invested in equity, crashes offer a chance to reduce their average costs by buying assets at low valuations. However, nobody can accurately predict how long the markets will keep struggling, and at what point they will break free. As such, it is advisable to have a long-term plan while investing in equity. A great way to hedge your risks and assure returns is to invest in equity mutual fund SIPs, which would help you make regular, disciplined investments over a long period, assuring you tax-free long-term returns.
Buy gold, but carefully
Gold is the go-to instrument during economic uncertainties. A traditionally favoured investment, gold may provide you conservative returns over the long term. When markets are volatile, you could buy gold and earn high short-term returns. However, gold prices too fluctuate wildly and buying it at peak prices could mean not earning returns for several years. Safe storage is also an issue, so you could also buy gold in a demat form through Sovereign Gold Bonds, gold ETFs and mutual funds investing in gold ETFs.
Don’t get greedy
The plucky investor knows how to make the best out of any situation. Market crashes and geopolitical risks provide him tempting opportunities to go all in and earn handsome returns. However, not everyone has the know-how to take such risks and win. Therefore, be careful while risking your money on the markets. Invest in a calibrated manner after due diligence, and avoid the temptation of taking loans to make these investments. If you’re already servicing loans, you should have a contingency fund to keep your repayments and other fixed expenses under check if you were to lose your employment in a falling market.
The author is CEO, BankBazaar.com